Public Comments | Budget, Taxes, and Public Investment

EPI comments on Treasury’s administration of the Coronavirus State and Local Fiscal Recovery Funds as part of the American Rescue Plan

Submitted online via regulations.gov

Office of the Undersecretary for Domestic Finance
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

RE: Coronavirus State and Local Fiscal Recovery Funds Interim Final Rule Comments,

RIN # 1505-AC77

Dear Office of the Undersecretary for Domestic Finance:

The Economic Policy Institute (EPI) is a nonprofit, nonpartisan think tank created in 1986 to include the needs of low- and middle-income workers in economic policy discussions. We appreciate the opportunity to comment on the U.S. Department of the Treasury interim final rule on the administration of the Coronavirus State and Local Fiscal Recovery Funds which were part of the American Rescue Plan (ARP).

In the comment, we focus on elements of the rule which can best promote its effectiveness as household income support, macroeconomic stabilization, and long-run growth policy. We make the following recommendations:

  • The ARP fiscal aid to state and local governments should be used to build, not degrade, public capacities. The rule’s prohibition on using the aid to finance tax cuts is enormously valuable in this regard.
  • Funds should be spent to provide public goods, services and investment or to provide direct transfers to economically vulnerable households. They should not be used to boost savings of recipient governments. The funds should not be used to increase rainy day funds, make debt payments, to reduce unemployment insurance (UI) trust fund debt balances or to replenish state UI trust fund balances generally. Any use like this would degrade the effectiveness of the ARP state and local fiscal relief.
  • Pre-COVID-19 levels of state and local employment should be the absolute bare minimum threshold for hiring targeted by the fiscal relief. Failure of state and local governments to restaff appropriately following the Great Recession was a major drag on recovery in the 2010s, and there are more than enough pressing social needs that could be usefully addressed with greater public employment.
  • If state and local governments devote some of the fiscal aid to direct transfers to households and individuals rather than providing public goods, services, and investment, the transfers should be targeted to economically vulnerable households. This is good policy on grounds of both household income support and macroeconomic stabilization.
  • Hiring public employees to help vulnerable households navigate the various income support programs they are entitled to receive would be a highly effective use of this aid. Employment of these “safety net advocates” could be temporarily surged while the ARP programs are disbursed, but should also remain at levels significantly higher than existed before the COVID-19 crisis: non-receipt of income support they are entitled to is a prime problem facing economically vulnerable families in the U.S.
  • ARP fiscal aid should largely not be used to aid businesses. Aid to businesses is inferior both in providing relief but also in providing macroeconomic stimulus. The key things U.S. businesses need in coming months is more customers and control of the COVID-19 virus, ARP fiscal relief should focus on these.
    • If state and local policymakers are determined to spend a large tranche of the ARP fiscal aid on aid to businesses, they should prioritize subsidized jobs programs for youth. Such programs both provide needed economic help to vulnerable families but have also been shown to provide large benefits to public safety.
  • State and local fiscal aid should prioritize strengthening labor standards, removing barriers to employment, and targeting high-quality jobs to workers and communities most impacted by the public health emergency and economic crisis, while ensuring public transparency and accountability.

Below, we expand a bit on each of these recommendations.

The ARP Fiscal Recovery Funds Should Enhance, Not Degrade, Public Sector Capacity

“Building Back Better” has been a key theme for the Biden administration in its policy efforts so far. In the case of the ARP state and local fiscal relief, this means that the immediate pre-COVID baseline for state and local spending should represent the floor, not the ceiling, on ambition for building up public sector capacity, and public investments over and above this pre-COVID baseline should be strongly considered. This recommendation reflects the fact that the severe spending austerity imposed by state and local governments in the aftermath of the Great Recession was damaging and led to large investment deficits that need to be addressed in coming years. 1

Redressing a decade of underinvestment by state and local governments means that fiscal relief should largely be spent and invested by public entities, and should not simply be used to finance tax cuts. Tax cuts are not only inferior as macroeconomic stimulus, they also will continue the one-way ratcheting down of public sector capacity that was so damaging during the recovery following the Great Recession.2

The rule’s prohibition against state and local governments using fiscal aid for tax cuts is eminently sensible and will greatly enhance its overall effectiveness in spurring economic recovery, growth, and household economic security in the coming years.

Fiscal Recovery Funds Should be Spent, Not Saved

The recovery following the Great Recession of 2008/09 was the slowest in recorded U.S. economic history, with a full decade passing before the pre-recession unemployment rate low point of 2007 was re-attained.3 Not coincidentally, this recovery also saw by far the slowest growth in state and local public spending in recorded history. EPI has estimated that this anemic growth in state and local spending by itself delayed a full recovery to the pre-recession unemployment rate by 4 years.4 Avoiding this kind of pronounced fiscal drag in the state and local government sector is a key rationale for why the ARP included significant fiscal recovery funds for these entities.

But state and local fiscal recovery funds must be spent to avoid a fiscal drag. If these funds instead are just used to bolster state and local government savings, this would not avoid such a fiscal drag. Contributing to state or local “rainy day” funds (reserves set aside to finance governmental operations during future periods of revenue shortfalls); making debt service payments or paying off accumulated debt – including intergovernmental debt owed through unemployment insurance (UI) trust funds; or transferring revenue to UI trust funds to avoid the need to raise UI taxes to replenish the funds post-COVID would all count as saving rather than spending the fiscal recovery funds. All of these actions should be avoided.

The interim rule sensibly prohibits using funds to bolster rainy day funds or to make payments on past debts, but does allow state governments to use funds to pay off debt owed through UI trust funds and replenish balances to pre-COVID levels. This last portion should be changed: paying off UI trust fund debt balances or transferring federal fiscal aid to state UI funds is every bit as much an instance of saving rather than spending fiscal recovery funds as other proscribed uses. The final rule should keep state governments from using relief funds for this. States that have already transferred ARA aid to UI funds should be enjoined from undertaking any benefit cuts (either to benefit levels, eligibility, or duration) to UI programs.

If state governments genuinely wish to strengthen their UI programs they should do so by increasing staffing and modernizing technology, with a particular eye on making UI more accessible to all populations, especially people with disabilities, people for whom English is not a first language, people without reliable home internet services, and those whose work and family schedules necessitate accessing the system outside of regular business hours. States should also further expand eligibility for unemployment insurance, increase benefit amounts and duration, and support work-sharing programs.5

Pre-Covid Employment Levels Are the Bare Minimum Employment Target

The interim rule allows unconditional use of fiscal recovery funds to rehire state and local government employees up to the levels that persisted before the COVID-19 shock in February 2020. It is certainly sensible to allow an automatic approval of this extent of rehiring in the administration of the fiscal recovery funds. However, by most reasonable estimates, state and local employment even in 2020 was below what pre-Great Recession trends would have predicted.6 Given this, the final rule should consider employment levels at some target greater than the February 2020 levels (say 5-10% above) to be a more-appropriate “safe harbor” for automatic approval.

State and local government employment has been slow to recover since the COVID-19 shock. Some have argued that these governments have discovered efficiencies during the crisis that could be carried over into recovery, hence necessitating less employment (keeping DMVs open just 3 or 4 days per week, for example). However, whether or not these are really efficiencies or just service degradation experienced by users of these public services is an open question. Further, even where some genuine efficiencies may have been found, the COVID-19 pandemic made it obvious that absolutely vital areas of state and local service provision – like local health departments and the administration of state UI offices – had been severely degraded over the previous decade and need substantial investment.7

Failure to rehire back to pre-COVID levels of public employment in state and local governments will lead to continued poor service in key areas of governance; will see a pronounced degradation of service even relative to the (insufficient) immediate pre-COVID levels; and will leave a long-lasting employment scar on the state and local workforce, damage that will fall disproportionately on Black communities.8 Finally, it will make it much harder to avoid a pronounced fiscal drag coming from the state and local sector in coming years. EPI has estimated in past work that every $1 associated with reduced hiring by state and local governments reduces aggregate demand in the private sector by roughly $0.60.9

Direct Transfers Should be Targeted

If state and local governments want to provide direct transfers of cash or in-kind aid to households, these transfers should be targeted to economically-vulnerable households. There are compelling arguments for universal programs having a role in the portfolio of public-sector policies aimed at providing economic security and full employment. But if universal programs are introduced, they are best done by the federal government with a holistic strategy for financing them. The ARP fiscal recovery funds are time-limited and fixed – every $1 spent doing one thing with these funds is money that cannot be used somewhere else. Given this, states and local governments should aim to provide the biggest boost to human welfare and economic growth per dollar spent. Both criteria argue strongly for having direct transfers to households and individuals be targeted at the most vulnerable.

These households will value each additional dollar in income made available more highly than more affluent households.10 They will also spend a higher fraction of each dollar they receive in aid, and this in turn will lead to more aggregate spending stemming from this aid, making it more effective as macroeconomic stimulus. 11

The interim rule indicates that direct transfers targeted to low and moderate-income households will receive ready approval, while transfers that threaten to spillover significantly to higher-income households will face more scrutiny and possibility of rejection. This seems like a very sensible portion of the rule.

Hire “Safety Net Advocates” to Maximize Aid Reaching Residents

Recent estimates have indicated that a huge share of rental relief included in past relief packages passed in the wake of the COVID-19 shock remains unclaimed. The amounts that have yet to be claimed would provide enormous gains to households and are macroeconomically significant – on the order of $40 billion.12

Earlier in the COVID-19 crisis, millions of U.S. households had UI payments significantly delayed due to an overwhelming of antiquated state UI offices as 22 million workers lost their jobs in just two months in April and May 2020. Our research indicated that as of June 2020, for every 10 jobless workers who successfully filed a UI claim, 3-4 were unable to complete a claim due to administrative backlogs, and 2 indicated that they were reluctant to even try to claim UI benefits because of the bureaucratic backlog.13

Even before the COVID-19 crisis, there was a growing recognition among researchers that administrative burdens and hurdles reduced take-up of crucial income support and social assistance programs. A recent paper, for example, found that “Among those eligible for targeted social welfare supports, approximately 30–80 percent actually receive them versus almost 100 percent for a more universal program such as Social Security.”14

Every dollar not claimed by a resident of a given state or local jurisdiction due to administrative complexity is a dollar not supporting household income security or economic activity. Given this, state and local governments should be willing to spend local resources to ensure that their residents receive all income support and social assistance payments they are entitled to. Hiring public employees to serve as “safety net advocates” for income support programs would be an excellent use of the ARP fiscal recovery funds. In the near-term, such employment could be temporarily “surged” to ensure that all fiscal relief funds find their intended purposes. Over the longer-term, state and local safety net advocates should be a permanent part of the public workforce, helping vulnerable families claim the economic aid they’re entitled to. It is important that these advocates have, as an explicit part of their job function, a goal of increasing public utilization of social assistance programs, not simply providing information in a neutral way. Otherwise, such programs can evolve into yet another barrier to people seeking to access the assistance they need.

Dollars flowing into state and local jurisdictions due to better navigation of administrative hurdles would be essentially found-money for these governments. As such, the rate of return assessed by state and local policymakers from this activity should be quite high.

Aid to Businesses Should Be a Small Part of the Use of Relief Funds

State and local fiscal incentives to businesses is one of the most-studied economic development strategies of recent decades. This literature indicates consistently that such incentives are far inferior to other development strategies. Bartik (2011), for example, finds that investment in education (particularly in early-childhood education) dominates many common forms of business incentives as a development strategy.15

As macroeconomic stimulus, a similarly comprehensive literature indicates that aid to vulnerable households and direct public spending provides larger economic “multipliers” than does most form of aid to businesses – particularly tax cuts.16

In the specific example of COVID-19 relief programs, the large business-relief program included in these efforts – the Payroll Protection Program (PPP) proved less efficient in delivering income and economic security to households than did the expansions to UI. The aggregate boost to personal income provided by the CARES Act UI expansions were substantially larger than the boost provided by the PPP, and, the number of employees credibly kept on payroll due to the PPP was substantially smaller than the number of jobless workers who received UI benefits during the crisis.17 The PPP was a good-faith effort to respond robustly to the COVID-19 pandemic, but, its own particular shortcomings and pre-existing features of the U.S. economy made it unlikely to succeed at scale, and so it didn’t.

In short, fiscal aid to businesses just has less of a positive track record in aiding vulnerable families or spurring economic activity than does direct targeted transfers or public spending. As such, aid to business should be a quite-small share of the portfolio of policies that state and local governments adopt to spend the ARP fiscal relief funds.

The ARP’s prohibition against net tax cuts should absolutely apply to business tax cuts, and disguised tax cuts like deferrals or abatements should be considered in contravention to this rule.

If state and local policymakers are utterly determined to include aid to businesses in how they spend the ARP fiscal relief funds, they should prioritize subsidized youth employment programs. Such programs have impressive track records both in providing income and employment opportunities to vulnerable households, but also in promoting public safety. 18

Use ARP Funds to Prioritize the Security of Workers Most Impacted by the Public Health Emergency and Economic Recession

Black, Indigenous, Pacific Islander, and Latinx people have experienced the highest death tolls from COVID-19.19 People of color are also more likely to work in frontline occupations and industries deemed essential during the pandemic and requiring in-person interaction at health care, child care and social services, and grocery and food production.20 Black and Latinx workers and women in particular tend to be paid less, have fewer workplace protections, and are also less likely to receive paid sick leave to take care of themselves or loved ones due to occupational segregation.21 State and local fiscal aid should prioritize strengthening labor standards, removing barriers to employment, and targeting high-quality jobs to workers and communities most impacted by the public health emergency and economic crisis while ensuring public transparency and accountability.

This can be done by using state and local recovery resources to set up permanent paid leave programs as well as additional time off during public health emergencies, provide emergency premium pay to frontline workers in “essential” industries, implement health and safety protections for frontline essential workers, and protect workers from retaliation by employers.22 Although permanent worker-support programs—such as paid leave—will likely require dedicated funding streams to persist in the long term, ARP funding can and should be used to establish administrative systems and pilot programs that could subsequently be made permanent.

Infrastructure investments can also provide critical public services while also creating high-quality jobs through partnerships with unions, high-quality job training through registered apprenticeship or DOL-recognized pre-apprenticeship programs, prevailing wage standards, targeted local hiring, and community benefits agreements.23 These measures support family-sustaining wages and job opportunities for the most impacted by the public health and economic crisis.

State and local resources should also help strengthen governments’ capacities to enforce existing labor standards. Wage theft, by the best estimates available, exceeds $15 billion a year just for minimum-wage violations, with billions more stolen in overtime violations, worker misclassification, and other illegal employer practices.24 Workplace injuries – not just in the COVID context – take a tremendous toll on communities. State and local governments should use resources to ensure that workers’ rights to a safe workplace and to the pay they earn are properly enforced. All of these efforts should be considered part of the ARP’s goal of achieving real economic recovery.

In addition, state and local recovery resources should be used to eliminate barriers to income and employment for people and families impacted by incarceration, and to support jobseekers locked out of employment due to systemic racism and discrimination in the labor market. As many as four in 10 adults in the United States possess a criminal record (including arrests), which can create barriers to housing, education, and employment25. Black and Latinx people are arrested, convicted, and incarcerated at higher rates than white people due to structural racism in policing, sentencing, and incarceration.26 State and local resources can be used to expunge criminal records, support pre-trial diversion programs for housing, health, and employment services, reinstate drivers’ licenses, and pay court fines and fees which unfairly target people of color.27 These too should be encouraged as effective uses of ARP funding in service of achieving an equitable economic recovery.

Consistent with the rule’s encouragement for community input on the use of funds, states and localities should be encouraged to consult with unions and other worker-support organizations, such as worker centers, as they make decisions regarding how to allocate ARP resources. Workers’ organizations should be consulted not just in their capacity as stewards of particular collective bargaining agreements, but as representatives of working communities, possessed of an understanding of the needs of working families that will be of material benefit to policymakers making spending decisions.

Clear public transparency and accountability measures are also critical to ensuring that public commitments to good jobs are met.28 Where state policymakers fail to request funding or attempt to use funding beyond the intended purposes of the Treasury requirements, local governments should be eligible to request the resources allocated to the state instead. The final rule should also include a complaint process with explicit enforcement mechanisms to address a state’s nonadherence to the rules.


Endnotes

1. On the damaging effect of austerity for recovery after the Great Recession, see Bivens, Josh. 2016. “Why Is Recovery Taking So Long – And Who’s To Blame”, Economic Policy Institute. On the pronounced underinvestment by state and local governments over this time-period, see Bivens, Josh. 2021. “Projected State and Local Revenue Shortfalls Are Shrinking, But the Value of Substantial Federal Aid to State and Local Governments is Not”, Working Economics Blog.

2. On the inferiority of state and local tax cuts as opposed to spending increases as macroeconomic stimulus, see Orzsag and Stiglitz. 2001. “Budget Cuts vs. Tax Increases at the State Level: Is One More Counter-Productive Than the Other During a Recession”. Center on Budget and Policy Priorities.

3. See Bivens (2016) from footnote 1.

4. See Bivens, Josh and Julia Wolfe. 2021. “State and Local Governments Still Desperately Need Federal Fiscal Aid to Prevent Harmful Austerity Measures”, Working Economics Blog.

5. For a comprehensive list of potential reforms that could be undertaken that would allow more UI funds to be spent rather than saved, see Bivens et al. 2021. “Reforming Unemployment Insurance: Stabilizing a System in Crisis and Laying the Foundation for Equity”.

6. See, for example, Gould, Elise. 2019. “Back-to-School Jobs Report Shows a Continued Shortfall in Public Education Jobs”, Economic Policy Institute snapshot.

7. See, for example, The National Association of County and City Health Officials (NACCHO). 2020. “2019 National Profile of Local Health Departments”, which highlighted a nearly 40,000 job reduction in public health employees between 2008 and 2019. On the underinvestment in UI administrative capacity, see Dixon, Rebecca. 2015. “Federal Neglect Leaves State Unemployment Systems in a State of Disrepair”. National Employment Law Project (NELP).

8. The state and local public sector has been a disproportionate employer of Black workers for decades, providing more equitable pay levels relative to their white counterparts than is typical in the private sector. All else equal, cuts to this sector, will fall most heavily on Black and women workers. See Cooper, David and Julia Wolfe. 2020. “Cuts to the state and local public sector will disproportionately harm women and Black workers.” Working Economics Blog.

9. See Pollack, Ethan. 2009. “Dire States – State and Local Fiscal Relief Needed”, Economic Policy Institute.

10. The common-sense notion that an economically struggling family will value another $100 of income far more than an affluent one is provided rigorous support by Layard, Nickell and Mayraz. 2008. “The Marginal Utility of Income”, Journal of Public Economics (92).

11. Evidence that transfers directed at economically vulnerable families provide larger macroeconomic multipliers has been summed up from various sources in Table 1 by Bivens, Josh. 2011. “Method Memo on Estimating the Jobs Impact of Various Policy Changes”, Economic Policy Institute.

12. DeParle, Jason. 2021. “Federal Aid to Renters Moves Slowly, Leaving Many at Risk”, New York Times, 4/25, updated 5/4.

13. Gould, Elise and Ben Zipperer. 2020. “Unemployment Filing Failures: New Survey Confirms That Millions of Jobless Were Unable to File an Unemployment Insurance Claim”, Working Economics Blog.

14. Herd, Pamela and Donald Moynihan. 2020. “How Administrative Burdens Can Harm Health”. Health Affairs Health Policy Brief, October 2.

15. Bartik, Timothy. 2011. Investing in Kids: Early Childhood Programs and Local Economic Development. Upjohn Institute.

16. See Bivens (2011) from footnote 9.

17. For the total boost to personal income provided by various aspects of the pandemic economic policy response, see: https://www.bea.gov/sites/default/files/2021-06/effects-of-selected-federal-pandemic-response-programs-on-personal-income-2021q1-3rd_0.pdf. For estimates of how many jobs were preserved by the PPP, see Autor et al. 2020. “An Evaluation of the Paycheck Protection Program Using Administrative Payroll Microdata”. Working Paper.

18. On the beneficial effect of summer youth employment programs on public safety, see Kessler, Judd, Sarah Tahamont, Alexander Gelber, and Adam Isen. 2021. “The Effects of Youth Employment on Crime: Evidence from New York City Lotteries”, National Bureau of Economic Research Working Paper #28373, and, Modestino, Alicia Sasser. 2017. “How Can Summer Jobs Reduce Crime Among Youth: An Evaluation of the Boston Summer Youth Employment Program”, Brookings Metropolitan Policy Program.

19. APM Research Lab staff (APM). 2020. The Color of Coronavirus: COVID-19 Deaths by Race and Ethnicity in the U.S. March 2021.

20. Rho, Hye Jin, Hayley Brown, and Shawn Fremstad. 2020. A Basic Demographic Profile of Workers in Frontline Industries

21. Gould, Elise, and Valerie Wilson. 2020. Black Workers Face Two of the Most Lethal Preexisting Conditions for Coronavirus—Racism and Economic Inequality. Economic Policy Institute, June 2020.

22. A Better Balance. Economic Policy Institute. and National Employment Law Project. 2021 .COVID Model Local Ordinance Package

23. Economic Policy Institute (EPI) and National Employment Law Project. 2020. Building a Just and Inclusive Recovery for All Workers: How States and Cities Can Respond to Workers’ Demands for Economic Security, Health and Safety Protections, and Workplace Democracy

24. Cooper, Dave and Teresa Kroeger, 2017. “Employers steal billions from workers’ paychecks each year,” https://www.epi.org/publication/employers-steal-billions-from-workers-paychecks-each-year/, Economic Policy Institute

25. Becki R. Goggins and Dennis A. DeBacco, “Survey of State Criminal History Information Systems: A Criminal Justice Information Policy Report, 2016,” US Department of Justice, Bureau of Justice Statistics, February 2018, Table 1, https://www.ncjrs.gov/pdffiles1/bjs/grants/251516.pdf

26. Equal Opportunity Employment Commission (EEOC). 2012. Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII of the Civil Rights Act. April 25, 2012

27. United States Department of Justice, Civil Rights Division. 2015. Investigation of the Ferguson Police Department

28. Good Jobs First. An Overview of Accountable Development


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